There isn’t a discussion about internet pricing these days; it is a shouting match. Still, I am going to explain why I think usage based billing makes sense for wholesale access and as an option for retail internet services.
I will say at the outset that I am not engaged by any client on this file and I have no projects underway for any of the large facilities-based internet services providers (“ISPs”). The opinions expressed herein are solely mine.
An internet access network requires continual investment. I think all ISPs agree on this point. Traffic growth continues, driven mainly by increased volumes per user, now that household penetration rates have approached 80% (network traffic growth had formerly been driven by two factors: rapid growth in number of subscribers and growth in usage per subscriber as multi-media applications increase in popularity).
As a result, the dynamics of network engineering have changed over the past 5 years, to accommodate ever increasing traffic loads on the access and internet backbone networks.
Among a number of methods of reaching their subscribers, many alternate internet service providers make use of a Gateway Access Service (“GAS”) from Bell Canada, which aggregates customers from across Ontario and Quebec to deliver their traffic to the alternate ISP at a designated location. For example, an alternate ISP can connect in Toronto as the gateway to reach their subscribers throughout Ontario and Quebec. The connection from the subscriber’s home to the Bell local office is dedicated to the end-user, so there is no traffic sensitive component to that “last mile”.
However, for GAS, the ISP does not connect at the Bell local office; the traffic is aggregated with all other ISPs’ access traffic and carried to the point of network interconnection. This middle network – from the local switching centre to the point of network interconnection – is traffic sensitive. This is an important point that seems to have been lost in many of the most recent discussions.
Keep in mind, even with ‘per subscriber’ pricing, wholesale services were usage sensitive. Bell didn’t take the total network access revenue requirement and divide it evenly among the total number of ISPs. Completely doing away with usage sensitive pricing for GAS would mean taking the total number of ISPs that use the network and divide evenly. This is an approach used for some wholesale services that are not usage sensitive. That would have resulted in smaller ISPs paying more than their share, since Bell has by far the largest number of subscribers using that shared access network.
In its response to a CRTC interrogatory in the proceeding that led to Telecom Decision CRTC 2010-255, Yak set out its views on the right mechanism for usage sensitive billing [pdf, 69 KB, see Interrogatory 3]. It is a perspective that was shared by CRTC Commissioner Molnar in her dissenting opinion on Decision 2010-255 and it is echoed in my suggested Way Out blog post from a few weeks ago.
When the Gateway Access Service was initially designed, some kind of average traffic load must have been assumed. The original pricing for GAS was flat rated per subscriber; there was no component to take into account utilization. The service is a number of years old, so we know that whatever the utilization assumptions were at the time, they can no longer be appropriate for today. If the traffic assumptions from a few years ago fit today’s usage patterns, then it means that ISPs would have been overpaying all this time. When traffic growth on the network was being driven – at least in part – by subscriber growth, then increased ‘per subscriber’ revenues provided funding for reinforcing the access network. Now that subscriber growth has leveled off, the driver for network augmentation is more clearly seen to be growth in subscriber traffic.
Some would argue that only use in the busiest period of the day drives network investment. That is correct in a simple world of only a few subscribers. But, consider that access networks are actually part of a large national network. It is not uncommon for traffic between two points to be routed in a very circuitous manner in order to take advantage of spare capacity wherever it may exist. This is good network management. But at a certain point, additional network infrastructure gets added to deal with increases in traffic load. Recent traffic studies have shown that the peak traffic period is not much of a peak at all; depending on the user base, traffic in the busiest hour of the day is often only about 20% higher than the daily average, down significantly from previous years.
The peak load on one cross-section may get relieved by re-routing across routes that have a lighter load. But as average loads increase to be a higher share of the daily load, there are fewer options for routing around congested circuits. What this means is that more of each user’s total traffic contributes to the network engineering, not just the user’s load in the peak hour of the day. active network management and continual investment in more infrastructure by all stakeholders is a reason that most users don’t directly witness significant congestion in their service.
The pricing for network re-engineering can be dealt with in a few different ways. For wholesale access, the regulator could conduct a rate setting review process every few years to confirm that the engineering model used for wholesale pricing adheres to the current experience. That could theoretically be an adjustment to a flat rate price. Alternatively, the regulator can seek to align the rates to match the drivers of the cost. when the CRTC realigned the GAS prices, it adjusted the flat rate component downward and added a usage sensitive component. As I have explained elsewhere, I think the usage sensitive component was set incorrectly, but this does not mean that the principle was wrong.
The problem with a flat rate ‘per subscriber’ model is that it does not associate network costs with the driver of those costs. I don’t think heavy users – and by that I mean households that have usage that is more than the average – are bandwidth hogs. Knowing that traffic is increasing dramatically each year, I think that heavy users provide an interesting window offering insights on the behaviour of next year’s average subscriber. Each ISP needs to develop strategies on how to offer services to that segment, as well as have an understanding of the various services to offer other segments in the market. Consumers benefit from having a wide array of choices in the market – choice of service providers and choice in pricing models.
The wholesale pricing model needs to be fixed to ensure consumers continue to have those choices.
